Consumer spending was weak in May, due to high gas prices

Americans spent in May at the weakest pace in 20 months, a sign that high gas prices and unemployment are holding back the economy. Consumer spending was unchanged last month, the Commerce Department said Monday. That was the worst result since September 2009. And when adjusted for inflation, spending actually dropped 0.1%. April's consumer spending figures were revised to show a similar decline when adjusting for inflation. It marked the first decline in inflation-adjusted spending since January 2010. Incomes rose 0.3% for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1% in May, after falling the same amount in the previous month.  Neil Dutta, an economist at Bank of America Merrill Lynch, pointed out that inflation-adjusted, after-tax income is now slightly lower than it was in January. "It was a very poor report all around," he said. "I think it's clear that higher gasoline prices are taking a bite out of consumer spending." Consumer spending accounts for 70% of economic activity. The spike in gas prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth. Fewer jobs and high unemployment have left workers with little leverage to ask for raises. And slow wage growth hurts the broader economy because consumers have less money to spend. Hiring slowed considerably this spring after a strong start at the beginning of the year. The economy created only 54,000 jobs in May, the lowest amount in eight months. That followed three months in which employers hired an average of 220,000 net new workers each month. The unemployment rate rose to 9.1% last month. The economy expanded at an annual rate of 1.9% in the January-March period. Many economists believe that growth is only slightly better in the current April-June period. A key inflation gauge followed by the Federal Reserve rose 0.2% in May, after increasing 0.3% or higher in each of the previous five months. But excluding the volatile food and energy categories, inflation rose 0.3% in May, the most since October 2009. An Associated Press survey of 38 top economists predicts that rate will be about 2.3%. Economists are optimistic for the second half of the year, saying growth should pick up to a 3.2% pace. They note that two of the biggest factors slowing the economy are abating. Gas prices have eased since peaking in early May at a national average of nearly $4 per gallon. In the past two months they have dropped to a national average of $3.57 per gallon, according to AAA's daily fuel gauge. U.S. factories are expected to begin producing more once Japan's factories resume more normal operations. The March 11 earthquake and tsunami in that country has led to a parts shortage, particularly for auto and electronics manufacturers. Still, growth must be stronger to significantly lower the unemployment rate. The economy would need to grow 5% for a whole year to significantly bring down the unemployment rate. Economic growth of just 3% a year would hold the unemployment steady and keep up with population growth. Americans boosted their savings a bit in May, keeping 5% of their after-tax income. That is up from 4.9% in April.